Fundamentals Week in Review

The only consistent thing about trading is its inconsistency, and for many of us, that’s what makes it fun.

At the beginning of the year following the recent slump in equities everybody was calling for an imminent recession, including me. Since then the S&P 500 has recovered half of its decline in just 4 weeks, the FTSE 100 has also been on a three-week rally while other indicators such as yields in the US, the MSCI Emerging Markets index and the VIX also suggests we are far from a precipice of doom.

We must remember though we are in unprecedented times in terms of political uncertainty and geopolitics and sentiment can turn on a dime. So as the markets begin to return to normal this week once again we must be prudent and watch what happens to price levels when the big players are back in town. It’s these big players that have much to lose and much to gain, and can single-handedly turn the market from risk onto risk off.

We also need to remember the context of where we are now versus this time last year. The Federal reserve were hiking interest rates aggressively, there was growing optimism in the EU around growth and the likelihood of tightening and there were no trade wars. So while the market looks relatively buoyant and risk on we have to be mindful that things could change very quickly and watch news and data releases on a regular basis to stay abreast of what’s going on.

Coming Up This Week:

The first news event to watch this week is Chinese GDP, not only important for China but for global growth as a whole. China has been exhibiting signs of slowing down recently, and some put this down to the trade tariffs implemented last year by the US, but whatever the reason, anything more negative than the 6.4% expectation could have a major drag on equities and see investors look for safety.

Remember the above will also have a significant impact on Australia and New Zealand as major trading partners. There are signs that a potential trade still between the US and China is in the offing, reports last week suggested that China had offered to remove the trade deficit by purchasing more from the US within 6 years, however this is unlikely to please Trump who would like this done by 2020.

The next event to keep an eye out for is New Zealand CPI, one of the big 3 in terms of releases. The RBNZ has maintained a balanced tone for a number of months now, citing that both interest rates could go up or down. This means this release is likely to have minimal impact but is important to watch for any clues for the future. Similarly the bank of Japan announces its interest rate decision in the early hours of Wednesday but again there is no expectation in a change of policy, even more so with the global growth and demand beginning to drop. One thing to look for is the possible change in inflation forecasts for Japan as there is a rumour that the BOJ would like to unwind some of the recent strength to get the yen back above 110.

On Thursday we have a lot of European PMI releases which will be critical as we have seen a somewhat downward trend recently. All predicted to be around the 50 level, remember anything below 50 is seen as contractionary, so these releases will give an important picture as to what the ECB might be planning longer term. It really has been bad timing for the ECB to end its asset purchase programme as since that decision European growth has slowed significantly, particularly in Germany and Italy who are likely to be in technical recession by the end of this year. At some point the ECB may have to start rolling back on its “end of summer” prediction for increasing rates, which would be quite bearish for the euro. They could start that process this week.

Then of course not a news release but how could I not speak about Brexit! I could literally write pages on the various scenarios but the reality is that nobody knows what is happening. The GBP strengthened last week as it seemed possible that there would be a softer Brexit if the UK Prime Minister had to negotiate with other parties, but lots of rhetoric over the weekend has suggested that is not the case. We could certainly see a drop in the GBP on opening.

Theresa May announces her “plan B” on Monday which is unlikely to be much different from “plan A” if all the rumours are true. Therefore it’s unlikely to go very far. Another possible outcome from all of this is a general election, people are talking about 28th of February as a possible date, that means that the Prime Minister would need to announce an election by Thursday. Many want a 2nd referendum, a.k.a. “the people’s vote”, but that would take over one year to arrange allegedly and therefore would need article 50 extended which the PM has ruled out. It’s an absolute mess and the shambles, and if it wasn’t for Mr Trump taking some of the limelight, the UK would be considered a laughingstock. My advice present continues to be to steer clear of any GBP pairs.

Regards

Andi

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